Life Cycle Costs and Reliability

Life Cycle Costs and Reliability Abstract: Reliability details are needed to predict end of life for components and systems. Failures and replacements drive costs during specific project intervals. Cost details from reliability analysis drive life cycle decisions for calculating a key financial performance represented by a single number for net present value (NPV). Paul Barringer, P.E. Barringer & Associates, Inc. P.O. Box 3985 Humble, T 77347-3985 Phone: 281-852-6810 FA: 281-852-3749 Email: hpaul@barringer1.com Web: http://www.barringer1.com Barringer & Associates, Inc. 2014 1 Why Do Life Cycle Cost and Reliability Facts Go Together? Facts About How Things Live and Die Reliability Money Issues Lowest Long Term Cost Of Ownership Reliability Details No Beginning & No End! Fact Based Business Decisions Life Cycle Money Issues Acquisition + Sustaining Cost + Time Value Of Money 2 Page 1 1

Human Bathtub Curves From the human experience we get reliability ideas Human Mortality Rate Infant Chance Old Age Bathtub Combined Rates Beyond the age of 10 years, infant mortality is not a big problem ------------------> 0 20 40 60 80 100 Age The y-axis is more precisely known as the hazard rate. Hazard rate measures the probability a person will die in the next time interval given they survived up to the beginning of the time interval. <---------------Beyond age 40, wear-out becomes a problem Similar curves exist for hardware. They form a survival signature with indications of survival under specific conditions. 3 Weibull Curves Tell Failure Modes Let Weibull tell you how they died 1. Weibull plots require few data. 2. Weibull plots tell about failure modes. 3. Weibull plots help guide corrective action. o o o o Beta tells the failure mode infant mortality, chance failure, or wear out. Eta tells the characteristic life. R 2 or PVE% tells the goodness of fit. 4. Weibull plots are often used with cost data to find least cost actions using risk assessments. o To an engineer, one Weibull graph equals 1000 + words from a statistician!! 4 Page 2 2

Maintenance Strategies & Costs Million $ / Month Cost Effects Of Failure Modes & Optimum Replacement 0.2 0.15 0.1 0.05 0 < Infant Mortality < Chance Failures Early Wear-out > < Old Age Wear-out 0 50 100 150 Time For wear-out problems, minimums can occur only if unplanned cost >> planned costs Convert reliability issues into time and money issues with Weibull analysis. 5 Failures: Roots Of Reliability Problems Early Plant Life Frequency % Data from nuclear power plants Design Error 35 Fabrication Error 1 Design Random Component Failure 18 Operator Error 12 People Procedure Error & Unknowns 10 Maintenance Error 12 Component failures Unknown 12 For a modern example see http://www.bpresponse.com 100 Don t forget MTBSE! Mature Plants People 38 People Procedures + Processes 34 Equipment 28 100 Procedures/Processes Machines 6 Page 3 3

Pump Curve Characteristics Who is responsible for correct results: At start-up? During normal operation Corrective action? Pump Curve Sensitivity For Pump Reliability % Head Poor-- Over Designed BEP = Best Efficiency Point This is the correct point for achieving the greatest inherent life for the pump System Resistance Curve Desired Poor Example Of System Resistance Curve Desired Excellent % Flow Intrinsic reliability-- is achieved at BEP (and measured by mean time to failure) Poor-- Under Designed Centrifugal pump curves are a wonderful advertising device leading naïve engineers to believe the entire curve is useful for long life---this is not true!--only a portion of the curve is useful! Pump Curve What s the root of the problems? People? Procedure? Equipment? 7 Pump Curve Practices--A Model Who sets the standard? Who communicates standards and reasons for conformance? % Head Low Flow Cavitation High Temperature Rise Low Bearing & Low Seal Life Best Efficiency Point Pump Curve Sensitivity For Pump Reliability Lower Impeller Life Better Practice = -20% to +10% Good (Commercial) Practice = -30% to +15% Avoid!! Suction Recirculation + Discharge Recirculation + + + + Best Practice = -10% to +5% of BEP + Barringer & Associates, Inc. 1999 Low Bearing & Low Seal Life Cavitation Characteristic Life ~MTBF % Reliability Reliability Curve Pump Curve % Flow This drives life cycle costs 8 Page 4 4

Life Cycle Cost Definitions Life Cycle Costs--All costs associated with the acquisition and ownership of a system over its full life. The usual figure of merit is net present value. Net Present Value-- NPV is a financial tool for evaluating economic value added. The present value of an investment s future net cash flows (a measure of a company s financial health) minus the initial investment for a given hurdle discount rate (the interest rate used in discounting future cash flows) are summed for the net. Need a life cycle cost Excel work sheet to calculate NPV? See: http://www.barringer1.com/anonymous/lcc.xls 9 Conflicting Issues--What To Do? Project Engineers: Minimize capital expenditures Maintenance Engineers: Minimize repair hours Shareholders: Maximize dividends and/or share price Production: Maximize uptime hours Reliability Engineers: Maximize equipment reliability to avoid failures Buy right? Or Buy Cheap? Accounting: Maximize project net present value 10 Page 5 5

Engineers Must Quantify All Costs Can you calculate NPV? Engineers Must Think Like MBA s And Act Like Engineers To Get Lowest Long Term Cost Of Ownership Over The Entire Life Cycle 11 LCC: A Management Decision Tool Provides a costing discipline Useful for procurement strategies Balances acquisition costs and operating costs Useful for trade-off studies based on facts Requires engineers to: Think like MBAs for cost considerations Act like engineers by using numbers for decisions Requires use of teamwork to generate numbers Think smart. Act smart. Be responsible. No one has all the answers. Think and act with a conscience! 12 Page 6 6

Engineers And Spreadsheets Most financial spreadsheets are generalities because engineers do not give accountants specific equipment details for making accurate financial calculations Engineers must add many equipment details to help accountants arrive at the correct economic impact-- I don t have the information is a void in decision process which drives poor decisions toward bad economic results If you don t have the information do what they taught you at the university: 1. Make a hypothesis 2. Test the hypothesis 3. Use your head! Common sense is an uncommon virtue. Don t wait! 13 What Goes Into Life Cycle Costs? Everything goes into LCC and each case is tailored for individual circumstances LCC follows a process that fits a simple tree for acquiring data Management appreciates you following a process more than you as an engineer may appreciate it. Step 1 2 3 4 5 6 7 8 9 10 11 Task Define the problem requiring LCC Alternatives and acquisition/sustaining costs Prepare cost breakdown structure/tree Choose analytical cost model Gather cost estimates and cost models Make cost profiles for each year of study Make break-even charts for alternatives Pareto charts of vital few cost contributors Sensitivity analysis of high costs and reasons Study risks of high cost items and occurrences Feedback Select preferred course of action using LCC 14 Page 7 7

Top Levels Of The LCC Tree LCC = Acquisition Costs + Sustaining Costs This is as simple as it gets! Acquisition Costs (May have quotes) Life Cycle Cost Tree Sustaining Costs (Always inferred) Acquisition costs and sustaining costs are not mutually exclusive find both by gathering correct inputs and identifying cost drivers 15 Hidden Costs Found By LCC Often sustaining costs (including hidden costs) are 2-20 times acquisition costs (obvious costs) About 65%+ of total LCC are fixed by the time equipment is specified (but only a few percent of funds have been expended at this point in time) Minimizing LCC pushes up NPV and builds stockholder wealth Finding the lowest long term LCC requires details for both acquisition costs and sustaining costs requires choices between alternatives Worry more about sustaining costs!!! Wham! A key issue! Think long term! Say it in NPV First alternative is the cost of doing nothing! 16 Page 8 8

Commitments And Expenditures 100 75 Funds Committed 85% 95% % Of LCC 50 25 Very important decision point! 0 Start Of Life Conceptual Design 66% Demonstration And Validation Acquisition Cost LCC Cost Reduction Opportunity Engineering, Manufacturing, And Construction Life Cycle Span Funds Expended Production And Salvage Sustaining Cost End Of Life 17 Branches For The Acquisition Tree Memory Joggers Acquisition Cost Tree Research & Development Costs Non-recurring Investment Costs Recurring Investment Costs Program Management Spare Parts & Logistics Upgrade Parts R&D Advanced R&D Manufacturing and Operations & Maintenance Support Equipment Upgrades Engineering Design Facilities & Construction System Intergration Of Improvements Equipment Development & Test Initial Training Utility Improvement Costs Engineering Data Technical Data Green & Clean Costs 18 Page 9 9

Branches For The Sustaining Tree Memory Joggers Sched. & Unsched. Maintenance Costs Labor, Materials & Overhead Replacement & Renewal Costs Replacement/Renewal Transportation Costs System/Equipment Modification Costs Engineering Documentation Costs Sustaining Cost Tree Facility Usage Costs Energy Costs & Facility Usage Costs Support & Supply Maintenance Costs Operations Costs Ongoing Training For Maint. & Operations Technical Data Management Costs Disposal Costs Permits & Legal Costs Allowing Disposition Wrecking/Disposal Costs Remediation Costs Write-off/Asset Recovery Costs Green & Clean Costs 19 What Costs Goes Where? Use common sense Each case is special Consider the details for BOTH acquisition and sustaining costs to develop the cost schedules When in doubt, include the costs Don t make this a career to complete the tasks! Don t ignore obvious costs or include trivial costs Include the appropriate cost elements and discard the trivial elements--use standard models 20 Page 10 10

A New View Of R&M Influence On LCC Save up front and defer costs until later by holding down engineering costs Use strong R&M engineering tools to reduce the largest cost components and reduce LCC Old Method 3 % Concept Non-recurring costs Recurring costs 12 % Design Develop 35 % Build and Install 50 % Operation and Support New Method 3 +1 = 4 % Concept Non-recurring costs Recurring costs Potential savings 12 + 3 = 15 % Design Develop Up to 3% Build and Install Up to 15 % Operation and Support Savings vary by type of project Get your money back quickly! Apply your technology Set R&M Goals Apply R&M Tools Eliminate Infant Mortality Verify Maintainability Requirements Monitor R&M Continuous Improve Program Source: SAE Reliability and Maintainability Guideline for Manufacturing Machinery and Equipment, 2 nd edition, M-110.2 21 The Big Picture For Each Phase Short List Of Reliability & Maintainability Activities Over The Life Cycle Phases The Big PictureTasks Concept & Proposal Phase Design & Development Phase Build & Install Phase Operation & Support Phase Conversion Or Decomm. Phase Set Availability Requirements ` Set Reliability Requirements Set Maintainability Requirements Tailor the to avoid too Define Functional Failures Tailor the matrix to avoid too Define Environment/Usage little little or or too too much much emphasis on on Define Capital Budgets and Make TradeOff Decisions R&M R&M but but meet meet the the needs needs of of the the Set Design Margins business to to make make the the effort effort cost cost Design For Maintainability Make Reliability Predictions effective Do FMEA & Fault Tree Analysis Do Preliminary Cost Of Unreliability Conduct Design Reviews Make Machinery Parts Selections Do Tolerance/Process Studies Do Critical Parts Stress Analysis Do Reliability Qualification Testing Do Reliability Acceptance Testing Do Reliability/Maintainability Growth Improvement Collect Failure Reports & Analize Barringer & Associates, Inc. 2007 22 Provide Data Feedback Page 11 11

LCC Requires Facts Based on typical equipment justifications, equipment rarely fails as maintenance cost is not detailed and not preplanned Real equipment needs constant and expensive maintenance activities--cm, PM, and PdM Most engineers don t acknowledge failure data exists and lack training in how to use the data LCC calculations depend on equipment facts--not opinions and reliability/maintainability details can decrease life cycle cost per SAE Get as many facts as you can gather and supplement them with your assumptions. Don t get bogged down in the trivia keep some altitude! 23 Which Equipment To Buy? A vendor offers three grades of equipment for solving our plant problem. Disregarding depreciation and other accounting details, which grade of equipment should we select for the lowest long term cost of ownership (assume plant life ends after 20 years = 175,200 hours). Good Better Best Cost of the new equipment $50,000 $75,000 $150,000 Watch out for the lure of cheap first costs! Which equipment will you buy?--why You need details to make the correct decision what do you need? 24 Page 12 12

An Arithmetic Model Reliability Models & Costs--Life Time Costs A vendor offers three grades of equipment for solving our plant problem. Disregarding depreciation and other accounting details, which grade of equipment should we select for the lowest long term cost of ownership (assume plant life ends after 20 years = 175,200 hours). What are the savings? Good Better Cost of the new equipment $ 50,000 $ 75,000 $ 150,000 Failure rate (failures/hour) 0.0005 Chance 0.0001 0.00001 Reliability for a 1 year mission? 1.25% Failures 41.64% 91.61% Number of failures in 20 years? # 87.6 # 17.52 # 1.752 20 year failure costs @$5,000/failure? $ 438,000 $ 87,600 $ 8,760 Equipment overhaul required every 5 yr Wear-out 10 10 Each overhaul cost is $10,000 Failures $20,000 $45,000 20 year number of overhauls & costs? # 3 $ 30,000 # 1 $ 20,000 # 1 $ 45,000 Operating/routine maintenance costs $1.00/hr $0.90/hr $0.90/hr 20 year operating/routine maintenance costs $ 175,200 $ 157,680 $ 157,680 Disposal cost at retirement $ 5,000 $ 5,000 $ 5,000 Total long term costs (ex depreciation, etc) $ 698,200 $ 345,280 $ 366,440 Long term cost of ownership = Initial cost + maintenance cost (include spares & outside services) + operating costs + disposal costs. Save $352,920 Watch out for changes in decisions when discount rates are used by accounting. Best Save $21,160 25 NPV For The Simple Arithmetic Models-- Arithmetic details converted to NPV. Alternative 1 Alternative 2 Alternative 3 Grade Good Better Best NPV -$191,861 -$125,465 -$176,556 Reliability 1.25% 41.64% 91.61% Least Expensive Life Cycle Cost $ ~NPV -100000-120000 -140000-160000 -180000-200000 Most Expensive Tradeoff Box For 20 Year Life 0 20 40 60 80 100 Lowest first price results In the worst NPV Effectiveness ~ Reliability % Highest first price is almost as bad as the cheapest first cost! 26 Page 13 13

Difficulty Of Cost Problems Problems are easy when the data is given The hard part is to collect the data Some problems are solved at the 65,000 level (few details), the 25,000 level (more details) and most problems are solved at the 2500 level (many details). Few life cycle cost problems are solved at the 6 level. Some costs can be estimated, others must be calculated Next we go to more difficult problems--finding the data Conversion: 65,000 feet = 20,000 meters 25,000 feet = 7,600 meters 2,500 feet = 760 meters 6 feet = 1.8 meters 27 LCC Summary Want more to read? See: http://www.barringer1.com/lcctrng.htm Life cycle costs include cradle to grave costs the first cost is not the only cost! Include reliability technology into LCC decisions to find quantities of resources required for life LCC provides a visualization technique for trade-off studies. Use NPV for sound financial decisions Good engineering produces LCC alternatives to search for the lowest long term cost of ownership In the end, the effort is all about the money and reliability analysis is a key tool to get to the money! Reliability and Life Cycle Cost go together for good business decisions! The plural word 28 Page 14 14